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Friday, January 27, 2012

This ain't no time to play hard ball!

There have been commentaries of late that Greece might consider playing hard ball with foreign creditors. One case in point would be the alleged consideration by the Greek government to pass a law which would - retroactively! - require holdouts in the PSI negotiation to take losses. Another case in point would be that with Lazard as financial advisers and Cleary Gottlieb as legal advisers, Greece has proven "big boys" in her court who have outmanouvered bondholders before.

Two years ago that might have been smart maneuvering; not today!

One of my major cricitisms of the government of Mr. Papandreou was that Greece, from the start, handed the management of her debt problem over to the EU. Instead, Greece should have taken the initiative from the start; making her own rescheduling proposals to existing creditors; making her own restructuring proposals of the public and private sectors; making her own budget consolidation proposals; etc.

Greece should have made it clear from the start that she expected the contribution of her existing creditors to come in the form of rescheduling the maturities of interest and principal way into the future. No more than that; and certainly no haircut!

Whether or not it was smart of Mr. Papandreou to play the referendum card, once he played it he should have used it as the great negotiating tool which it could have been. Not to threaten default but rather to obtain substantial new financing for investments in the economy.

Today, a certain fatigue on the part of the self-appointed EU-rescuers is quite noticeable. Officials/politicians between Paris, Brussels, Frankfurt and Berlin are making statements today which they wouldn't have dared to make a year ago. When one side has accepted the fate of losing the game, it becomes virtually impossible for the other side to make them nervous again. The degree of nervousness about a possible Greek default has certainly declined dramatically between Paris, Brussels, Frankfurt and Berlin.

This is why now is the worst time for Greece to show muscle. It is unlikely to have any effect on the other side and it would certainly lead to dramatic long-term damages for Greece.

To force creditors by law to take losses is more or less equivalent to repudiating part of one's debt. The repudiation of sovereign debt is probably the silliest thing a first-world country could do. There is no upside to it and unlimited downside. Furthermore, to accomplish this by making a new law with retroactive application is even sillier than repudiating debt outright. Legislation with retroactive application is more or less the equivalent of disavowing the State of Law. How would a foreign investor ever trust Greek legislation again?

At this point, the Greek government should rely more on advisors with "peace-negotiating skills" rather than on financial and legal sharks. There is absolutely no need to threaten with an event (default) which is going to happen automatically anyway unless others step up to avoid it. Greece alone can't avoid it.

Should default occur, Greece will need to have friends at those institutions which can provide bridge-financing so that state and economy don't collapse entirely. These friendships must be built up now!